As Vanguard pushes into private equity, some fans get queasy

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Vanguard built a reputation for democratizing investment, bringing institutional products to the masses, and doing so inexpensively. Its retail-investor-friendly moves — index funds and low fees — have made it a choice for millions of investors.

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But the asset manager’s recent push is giving some fans pause in private-equity markets.

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The $7 trillion asset manager began providing institutional clients — pension funds, endowments and so on — for private-equity investments in 2020 through Harbourwest Partners, an $85 billion, independent global private market investment firm. It spread to wealthy individuals earlier this year.

Vanguard would not disclose how many customers invested in its first offering to individuals, Vanguard HarborWest 2021 Private Equity Fund, or dollar volume, but Fran Kinnari, global head of private investments for Vanguard, said the fund giant has exceeded its targets “by a considerable margin.”

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Private equity is very different from the stock market – notoriously expensive and opaque, with little regulatory oversight and often requiring individuals to hold money for a decade or more. It is open to individuals who are qualified buyers — those with $5 million or more in investments — or accredited investors — with a net worth of at least $1 million, or more than $200,000 in annual income.

Vanguard’s entry into this market comes when the Department of Labor allowed plan sponsors to add private-equity investments to defined-contribution plans as part of a professionally managed asset-allocation fund, commonly known as a target-date fund. is referred to as. No one has done that yet, but private-equity proponents are pushing for it to become a reality. Vanguard is a top choice in 401(k)s and runs one of the largest target-date fund businesses.

Vanguard’s first offering to individuals sets a $500,000 minimum investment, which is made over three years, and the term, or lockup period, is 14 years. The minimum investment in many Vanguard mutual funds is only $3,000, and some have minimum penalty-free holding periods.

Jack will ‘roll in his grave’….

Some advisors believe that Vanguard’s entry into private equity underscores that the firm is no longer the firm founded by Jack Bogle in 1975.

“I doubt [Bogle] Will roll in his grave” if asked about private-equity, said Alan Roth, certified financial planner and founder of Wealth Logic, an investment advisory and financial planning firm in Colorado Springs, Colo.

Roth said he understands that Vanguard is pursuing private equity for competitive reasons; Money managers like Goldman Sachs and BlackRock are already in this area. “But I don’t necessarily agree with that.”

Rick Ferri, an investment advisor at Ferri Investment Solutions in Georgetown, Texas, also hosts a host of boggleheads on investing. podcast, where he spoke at length about his concerns with a guest. He is particularly concerned about the high fees of private equity and whether these investments could be opened to the public in the same way that index investments were still commanding higher returns.

“That’s not how Jack thought about things. But then, you know, when Jack was there, he had $150 billion in management. So it’s definitely a different company,” Ferry said.

Kinnari said Vanguard’s move into private equity follows in Bogle’s footsteps and gives individual investors access to markets traditionally open only to institutions. “What Jack stood for was taking a stand for all investors, especially retail investors. We find that this foray into private equity follows the same exact template with which he started indexing,” he said. said.

The lead in Vanguard lowering fees for its mutual funds and exchange-traded funds caused a ripple effect across the industry. This gave rise to the term “vanguard effect”, which means any segment of the market the fund giant entered. Morningstar said in its annual US funds fee in August Study That the average expense ratio paid by fund investors is half of the average expense ratio 20 years ago.

Ferry and Roth both said they don’t know what Vanguard is charging investors for this private-equity fund, and Vanguard’s Kinry would not disclose it, saying only that the fees were charged by Vanguard’s actively managed mutual funds. exceeds the cost of funds, which are approximately 0.40% to 0.50%.

Private-equity fees are usually not disclosed, but they are often heavy, typically 2% of assets under management and 20% of profits, referred to as “2 and 20”.

Vanguard chose Harbourwest because of the company’s long-term performance record and its philosophy of putting client results first, which Kinary said was the most unique of the managers interviewed.

Will the strong returns continue?

Citing the general caveat that past performance does not equate to future results, Kinnari pointed out that HarborWest outperformed the MSCI ACWI Index, which Tracks approximately 3,000 stocks in 49 developed and emerging market countries, which total 700 to 800 basis points above all charges in the firm’s more than 35-year history. Vanguard has a more conservative estimate of expected outperformance, and if private equity becomes more democratic, returns could fall, as the firm expects, he said.

“We are thinking somewhere that the net return on the public markets will be 300 to 400 basis points,” Kinnari told investors, repeatedly emphasizing the lockup period of these types of investments. He later added, “If the future is anywhere, even half of it with Harbourwest, we believe investors will have higher net results, even if their costs are higher. “

Another concern of Roth and Ferry is whether the higher returns will persist if more investors are fighting over the opportunity to invest in good private companies. Consultant at Deloitte Forecast The increased interest could increase private-equity assets under management to $5.8 trillion in 2025 from $4.5 trillion in 2019.

It can also reduce the liquidity premium – the reward private-equity investors traditionally have for locking in their money for years. Kinnari said that historically more investors enter the market, but it will not disappear, historically should be reduced by about one-third or half of the 3 percentage points, but it will not disappear.

He said investors should focus on the demand side of private equity, not on the supply side. There are a lot more small, private companies than public firms, and these are smaller companies without private backing. “As private-equity supply increases, we are seeing more and more demand side. And so I think the two will very easily equate to each other,” he said.

Kinnari also suggested that investors who are saving for children or grandchildren may not need to put all their money into easy-to-sell assets like stocks and bonds.

“If I have a 30-year horizon, and I can get 100 to 200 basis points in illiquidity premium, why don’t I want 20 or 25 or 30% of my portfolio (in real estate)? You don’t want to go too far. You don’t want to be 80% liquidated. But I would argue that investors are probably too liquid given their time horizon,” he said.

Debbie Carlson is a Businesshala columnist. follow him on twitter @DebbieCarlson1,


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